A message from Mike: The opportunities of volatility

Tuesday 6 March, 2018

A message from Mike: The opportunities of volatility

Big moves

February marked the return of volatility to equities after a 14 month hiatus. The last episode was the election of US President Donald Trump in November 2016, and before that, Brexit in July 2016. Whilst we didn’t know it at the time, last year really was a goldilocks period for investing. 2017 was one of the least volatile years for asset prices in history, notably the S&P 500 barely had a blip all year rising almost in a straight line and advancing every month (which has never happened before).

However, despite January continuing this trend, February showed us that while the Bear might still be hibernating, he can do some serious damage when disturbed from slumber; a rise in inflation expectations and interest rates the trigger.

In the first week of February, US equities fell over 10% with most global markets following suit. This volatility also carried through to the ASX and NZX with some extreme reactions to good and bad results. For example, the market decided to value A2 Milk at almost 50% more than the month prior, resulting in A2 becoming New Zealand’s largest company. On the downside there were many including Sky TV, BIG Un Limited and Get Swift. Within Pie’s portfolios we saw some huge moves both ways. The highlights being Smart Parking, Aurelia Metals and Kogan.com. I believe that 2017 was an anomaly, and that volatile markets are the norm not the exception.


For those who have an investment in the Multi-Strategy Fund, the return of volatility is good news as it provides more opportunities for profit. I’m very pleased with how the fund performed in February and whilst early days, I believe the performance is showing investors the benefit of having a product like the Multi-Strategy Fund as part of your diversified portfolio. The fund was up 2% in February with most of those gains captured in the first few days as I closed the out-of-the money put options for a substantial profit. Unfortunately, that meant that a large portion of my Waitangi Day was spent watching the markets and attending to the portfolio – the downside to having a job overseeing something that never sleeps! But that is why you employ Pie Funds, so you don’t have to think about that kind of stuff.

The sudden jump in volatility was the largest change in volatility since records began in 1991 (see Figure 1), bigger than the 2011 Greek Crisis and the Lehman Brothers collapse in 2008. Note it wasn’t the MOST volatile markets have been, just the biggest change in volatility. I think it’s fair to predict that 2018 won’t be a repeat of the goldilocks year that was 2017. The environment will be more challenging, and risks are rising. Are you prepared? Do you have any funds invested in a fund like the Multi-Strategy? Better to resolve this now than after the fact. Prices move as expectations change, before the fact, not after it. 

However, please don’t think I am sounding the alarm, because as we have seen with the like of A2 Milk in February (currently held in Growth 2), there is still money to be made when businesses exceed expectations and that’s what our Growth products are looking for.

Mar18 A message from mike graph


Pie Wealth

In other big news, Pie Wealth is on its way! We will have more information available later this month (including the team we have hired) for an April launch. We look forward to being able to assist you with your investment portfolios and provide financial advice. Please contact us if you have any questions.

As always, thank you for your support. If you have any questions please don’t hesitate to call me on (09) 486 1701, or email me, mike@piefunds.co.nz.





What is the objective of the Multi-Strategy Fund?

The Multi-Strategy Fund aims to deliver positive returns regardless of movement in equity, interest rate or currency markets over rolling two-year periods. Like Pie’s other funds, the focus is on equities. But Multi-Strategy has more flexibility to use multiple different strategies, markets, asset types, and time periods to manage risk or take opportunities arising from markets.


What are options and how does the Multi-Strategy Fund use them? 

Options provide the right, but not the obligation, to buy or sell a security at a set price, on or before a set date. Options can be purchased for a wide range of securities – including single shares and indices. Call options give you the right to purchase at a set price on or before set date. Put options give you the right to sell. Pie Funds typically uses options as insurance, to offset the effects of downward market movements. Sometimes, however, depending on the options purchased and the amount of market movement, options can be very profitable as well as managing risk. That is what happened in the Multi-Strategy Fund. Prior to the recent market volatility, we purchased put options for Multi-Strategy, giving the right to sell [the S&P index] at a certain price on or before a set future date. When the volatility hit, the actual price of the option increased. So, we sold the put options for a substantial profit. Note that options carry a cost – its premium, like an insurance policy – and if the market remains above the put option level, right up until the option expires, the premium is lost.


Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser.